Why is everyone so bothered about the Italian Referendum?

Italy voted yesterday to reject Constitutional Reform. 59.1% voted No on a turnout of 68%. The Prime Minister Matteo Renzi resigned.

But why is the world so spooked by a mere rejection of Constitutional Reform?

It is because it is likely to trigger a new general election. So what? Everyone has general elections from time to time. But because Italy has changed it's rules, this time it will be different.

image source

Democracy Italian Style

Because of the fallout of Mussollini's dictatorship, the 1948 constitution was absolutely choka with checks and balances. Italy has a bicameral system, where the elected Senate has equal power to the elected House of Deputies, and nothing gets through until both houses agree. It is different from the United States where the responsibilities of the Senate are different from the responsibilities of the House of Representatives. In Italy they have the same responsibilty and the two houses act in opposition to each other, and on top of that you have opposition between parties in both houses, and on top of all that, you have at least 15 parties with elected members at any given time.

As a result Italy was famous for governments falling after just a couple of years, but strangely that didn't affect the economy. National gridlock meant that the regional governments really ran the show, and they were doing it well, resulting in famous Italian brands emerging after WW2 like Lamborghini, Ferrari, Fiat, Prada, Versace and many more. La Dolce Vita was in full swing, post war Italy was doing the best it had done since the Renaissance in the 15th century.

Then in 1999 Italy joined the euro, at a rate that was too high. And then the European Central Bank made a mistake and cut rates in the early 2000's, to rescue a Germany that was in recession. The only problem was that interest rates were too low for Italy (and too low for Greece, Ireland, Spain, France and literally everyone else). The ECB was acting like Germany's economy was the only one that counted, and created a bubble elsewhere with their mistake.

Cue to the 2008 financial crash, and the bubbles burst. Italy needs a weak currency to help it recover and export it's way out of it's problem, but it is locked into the same currency as Germany which now needs a strong currency - and once again, the eurozone is being run for the benefit of Germany.

Then the EU started to get anti-democratic. In 2011, they deposed the elected Prime Minister, Berlusconi, for saying that Italy needed to exit the euro. Berlusconi was a sleazy guy, famous for his "bunga-bunga" parties, but his management of the Italian economy wasn't bad given the weak hand he had to play. His replacement was the unelected eurocrat Mario Monti, an ex Goldman Sachs man who had been an EU Commissioner. Monti's "reforms" abruptly made Italy's position worse, and the national debt soared, as did unemployment. And anger among the citizens that they were being by-passed meant that nothing he did had popular support.

The 2013 elections

Italy finally had new elections in 2013, and Monti's attempt to get a mandate failed. But Berlusconi's centre-right coalition didn't do well either, the Italians thought they'd give the centre-left alliance Common Good a try. But Italy's problems were worsening, thanks to the euro, which was out of control of any politician, and only the Five Star Movement openly admitted the problem.

Manoeuverings meant that the new Prime Minister Enrico Letta resigned in 2014, and Matteo Renzi became PM. He was more centrist than centre-left, but he was not elected, but an appointed figure. And instead of focussing on the economy, he started focusing on Constitutional Reform.

Matteo Renzi - image source

Italicum

Renzi pushed through a change in law through both houses, known as "Italicum", that amends the number of seats a party gets in the House of Deputies. If no individual party gets 40% of the vote (something very hard to achieve in a multi-party system), then a second round of voting commences between the two leading parties in the first round, and a bonus system means that the winner is guaranteed at least 54% of the seats in the House of Deputies.

Under the old system, if your party and coalition didn't get a majority in the House of Deputies, then you had to compromise with the other elected deputies on a case by case basis.

In addition, Renzi wanted to abolish the Senate and replace it with an appointed body that couldn't thwart the House of Deputies. In other words he was trying to concentrate power in the hands of the executive.

The referendum was about the changes to the Senate, and the Italians voted No because they thought abolishing the elected senate was very dangerous. Especially as in the Italian system both senators and deputies are exempt from prosecution, so the only way to deal with an errant senator is for voters to throw him out of office, which then allows the courts to prosecute. In an appointed system, crony politics means that crooks would have been appointed to the senate, beyond the reach of both the voters and the courts.

So the Italians definitely did the right thing to say No. But the first change - bonus seats to give a single party or alliance an overall majority in the Deputies - remains.

Squeaky bum time for Renzi's allies

The first rule when changing constitutions is to ask yourself, "would I be happy if the opposition had all this power"?

Renzi and his allies didn't ask this question, and now they are terrified, because the insurgent populist Five Star Movement is leading in the polls. In the next election, there is a good chance that they will get the most votes. And under Renzi's new system, they will get bonus deputies and an overall majority to enact their key platform - a referendum on whether Italy should remain in the Euro.

Renzi was encouraged in his reforms by the EU and Germany's Merkel. In their foolish brains, they believed that Italy's problems are nothing to do with the flawed way the eurozone was constructed, but instead with the 1948 constitution. They recommended he concentrate power in his hands in order to force those pesky Italians to do what he told them, and he in turn would get his instructions from the EU. Instead he has delivered potential power to those who will tear down the entire eurozone, and they mean to win and do it.

And have I mentioned the banks?

Just to up the stakes, Italian banks are in trouble. This is not because they got into sub-prime lending or CDCs or the other problems of investment banking. They were so prudently run, they sailed through the 2008 financial crash without needing a bailout.

However the "reforms" imposed in 2011 by Mario Monti, the unelected eurocrat, so crippled the economy that good loans started to go bad. Unless the economy recovers, they will need a bailout.

Only Renzi agreed a new EU law that there would be no more bail-outs from January 2016, only bail-ins. This would wipe out the savings of ordinary Italians, making them even more inclined to vote for Five Star to exit the euro. Italian banks are trying to raise capital as we speak, and if they fail and go down, and the state is prevented from rescuing them, then general election here we come with the mother of all crises ensuing.